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Financial regulations Updated: 16 May 2019

Europe approves a new package of banking measures

The European Council announced this Tuesday that it has approved a series of regulatory changes previously approved by parliament, which aim “to reduce risks in the banking system.” The legislative package, known as CRD-V, revises capital requirement legislation and the recovery and resolution framework that governs financial institutions within the eurozone.

With the approval of CRD-V, the EU has moved forward with the implementation of a new framework to strengthen the banking union and reduce risks in the financial system. This new set of measures includes among its goals the incorporation of the new Basel Standards (with the exception of Basel IV); a new total loss absorbing capacity (TLAC) requirement for institutions that are deemed to be global, systemically important by the Financial Stability Board (FSB); and the adoption of some technical adjustments identified in prior years.

As communicated in its news release, the European Council wants to reduce “risks in the banking sector and further reinforce banks’ ability to withstand potential shocks.”  The EU body views this legislation as “a stepping stone in the deepening of the Economic and Monetary Union. It also brings the EU in line with its international commitments.”

According to Ana Rubio, Head of Financial Regulation at BBVA, “this reform represents a significant step forward in the reduction of risks in the European banking system and in the Banking Union.” Therefore, “the industry is situated to begin sharing risks in parallel, specifically via a common European deposit insurance scheme,” she says.

Ana Rubio (BBVA): "This reform represents a significant step forward in the reduction of risks in the European banking system and in the Banking Union"

What measures are included in the package?

The European Council explains that these measures represent the implementation of international reforms agreed after the 2007-2008 financial crisis “to strengthen the banking sector and address remaining challenges to financial stability.” They were introduced in November 2016 and include elements agreed by the Basel Committee on Banking Supervision and the Financial Stability Board.

The package includes key measures such as a leverage ratio requirement for all institutions as well as a leverage ratio buffer for all global, systemically important institutions. It also introduces a net stable funding requirement (NSFR) and a new market risk framework for reporting purposes.

Furthermore, it obligates third-country institutions with significant activities in the EU to have an EU intermediate parent company; it  introduces a minimum requirement for own funds and eligible liabilities (MREL) for all institutions, a requirement that is enhanced for global, systemically important institutions and other large banks; and it approves further moratorium power for the resolution authority.

The banking package “also includes a number of targeted measures to cater for EU specificities, such as incentives for investments in public infrastructures and SMEs or a credit risk framework facilitating the disposal of non-performing loans,” the Council declared.

“Thanks to the introduction of key measures such as the binding leverage ratio for all banks and the introduction of a ‘total loss-absorbing capacity’ for the biggest institutions, banks will be better capitalized and better equipped to withstand market turbulences,” points out Eugen Teodorovici, Minister of finance for Romania, which currently holds the presidency of the Council.

When will the package take effect?

The regulation was approved on May 14, and will be published in the EU’s Official Journal in June, although it will only come into force 20 days later. There will also be a one to two-year period of national “transposition” or local level implementation, although some of the legislative elements, like the TLAC requirement for global, systemically important institutions (G-SIIs) will be enacted immediately.